1. Field of the Invention
This invention relates to the allocation and management of pollution costs and credits. More particularly, it relates to a method for banking a portion of the cost of a resource and rebating portions of the banked fund on the basis of activities relating to the use of the resource.
2. Description of the Related Art Including Information Disclosed Under 37 CFR 1.97 and 1.98
Many natural resources, especially fossil fuels, comprise pollutants which have a negative impact when released into the environment. Some pollutants are impurities in the resource material—e.g., sulfur and mercury in coal—whose level may vary depending on the source and/or processing steps taken during recovery of the resource. Other pollutants result from the use of a resource—e.g., oxides of nitrogen (NOx) and the greenhouse gas carbon dioxide (CO2) created during the combustion of hydrocarbon fuels. When NOx and volatile organic compounds (VOCs) react in the presence of sunlight, they form photochemical smog, a significant form of air pollution, especially in the summer. Children, people with lung diseases such as asthma, and people who work or exercise outside are particularly susceptible to the adverse effects of smog such as damage to lung tissue and reduction in lung function. Mono-nitrogen oxides eventually form nitric acid when dissolved in atmospheric moisture, forming a component of acid rain.
The pollution potential of some natural resources depends on the particular use that is made of the resource. For example, wood used as lumber may sequester the carbon comprising that wood for decades whereas the same wood used as firewood releases the carbon as carbon dioxide and VOCs into the atmosphere. As a further complication, different portions of a natural resource may be put to different uses. When harvesting a tree (a natural resource), the stump, roots and foliage may be composted; the straighter portions of the trunk sawn into lumber; the branches chipped for use in oriented strand board (OSB) or ground for medium density fiberboard (MDF); and, the bark burned in a furnace. Likewise, a barrel of crude oil may be partially fractionated into various fuels (bunker fuel, diesel, gasoline, kerosene and jet fuel), partly used as lubricating oil and partially used for the production of petrochemicals. Absent a recovery mechanism, the carbon in that crude oil will enter the atmosphere (predominately) as CO2 for that portion of the oil used as fuel but the carbon in the lubricating oil fraction and petrochemical products may not (depending on the form of their ultimate disposal).
Greenhouse gases are components of the atmosphere that contribute to the greenhouse effect. Greenhouse gases include (in the order of relative abundance): water vapor, carbon dioxide, methane, nitrous oxide, and ozone. Greenhouse gases are known to emanate from both natural sources and human activity.
With the increase in concern over global climate change, a great deal of interest has been directed to the emission of greenhouse gases, carbon dioxide in particular. When a hydrocarbon is burned—i.e., oxidized—carbon dioxide and water (both greenhouse gases) are produced. By way of example, consider the combustion (in air) of natural gas (consisting essentially of methane):CH4+2O2→CO2+2H2OThe combustion of each molecule of methane produces one molecule of carbon dioxide.
Likewise, consider the combustion (in air) of gasoline (a mixture of hydrocarbons which can be represented by octane, C8H18):2C8H18+25O2→16CO2+18H2OThe combustion of each molecule of octane produces eight molecules of carbon dioxide.
“Operating netback” is a financial metric used specifically in the oil and gas industry as a benchmark to compare performance between time periods, operations and competitors. It is a measure of oil and gas sales net of royalties, production and transportation expenses. The measure is generally calculated based on the oil or gas selling unit—e.g., per barrel in the case of oil. For example, suppose an oil company's Canadian operation sells oil at an average of $80 per barrel if royalties, production and transportation costs equal $25, $15 and $18, respectively. In this case, the operating netback for the Canadian operation equals $22 a barrel. The calculated operating netback can be compared to the specific operations' past performance or a competitor's performance in the same region.
Various schemes have been proposed for reallocating the pollution costs associated with using certain resources. For example, “personal carbon trading” is designed to be a mandatory program wherein emissions credits are equally allocated to individuals on a per capita basis, within national carbon budgets. Individuals would then have to surrender these credits when buying fuel or electricity. Individuals wanting or needing more energy would be able to partake in emissions trading to secure more credits, similar to what companies do now within the European Union Emission Trading Scheme.
The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme. Under the EU ETS, large emitters of carbon dioxide within the EU must monitor and annually report their CO2 emissions, and are obliged to surrender (give back) every year a number of emission allowances to the government that is equivalent to their CO2 emissions in that year. The installations may get the allowances without cost from the government, or may purchase them from others (installations, traders, the government.) If an installation has received more free allowances than it needs, it may sell them to anybody.
Emissions trading (sometimes called “cap and trade”) is an administrative approach intended to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. A central authority (usually a government or international body) sets a limit or cap on the quantity of a particular pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, thereby limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was required. Thus, in theory, those who can most easily reduce emissions will do so, achieving the pollution reduction at the lowest possible cost to society. There are currently active trading programs in several pollutants. For greenhouse gases, the largest is the European Union Emission Trading Scheme. In the United States there is a national market designed to reduce acid rain and several regional markets in oxides of nitrogen.
A carbon tax is a government-imposed tax on energy sources which produce carbon dioxide. Typically, the price per unit of emissions is fixed—i.e., there is not a fluctuating market price. The European Union has discussed a carbon tax covering its member states to supplement the carbon emissions trading scheme begun in January 2005—the EU ETS trading scheme discussed above.
The purpose of a carbon tax is environmental—to encourage users to reduce their emissions of carbon dioxide and thereby slow global warming. It can be implemented by taxing the burning of fossil fuels—coal, petroleum products such as gasoline and aviation fuel, and natural gas—in proportion to their carbon content. Unlike market-based approaches such as carbon cap-and-trade systems, it has the advantage of being easily understood and the tax revenues generated can be used to fund environmental projects.
On Jan. 1, 1991, Sweden imposed a carbon tax on the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel. Industrial users paid half the rate and certain high-energy industries such as commercial horticulture, mining, manufacturing and the pulp and paper industry were exempted from the tax. Finland, the Netherlands, and Norway also introduced carbon taxes in the 1990s.
A carbon dioxide (CO2) sink is a carbon dioxide reservoir that is increasing in size, and is the opposite of a carbon dioxide “source.” The main natural sinks are (1) the oceans and (2) plants and other organisms that use photosynthesis to remove carbon from the atmosphere by incorporating it into biomass and release oxygen into the atmosphere. This concept of CO2 sinks has become more widely known because the Kyoto Protocol allows the use of carbon dioxide sinks as a form of carbon offset.
Carbon capture and storage is a scheme to mitigate global warming by capturing carbon dioxide (CO2) from large point sources such as fossil fuel power plants and storing it rather than releasing it into the atmosphere. Technology for large scale capture of CO2 is commercially available and fairly well developed. Although CO2 has been injected into geological formations for various purposes, the long term storage of CO2 is a relatively untried concept and as of the date hereof no large scale power plant is known to operate with a full carbon capture and storage system.
Currently, capture of carbon dioxide is performed on a large scale by absorption of carbon dioxide onto various amine-based solvents. Other techniques have been proposed including pressure swing adsorption, temperature swing adsorption, gas separation membranes, and cryogenics. Pilot studies have included flue capture and conversion to baking soda and the use of algae for conversion to fuel or feed.
In coal-fired power stations, the main alternatives to retrofitting amine-based absorbers to existing power stations are two new technologies: coal gasification combined-cycle and Oxy-fuel combustion. Gasification first produces a “syngas” primarily of hydrogen and carbon monoxide, which is burned, with carbon dioxide filtered from the flue gas. Oxy-fuel combustion burns the coal in oxygen instead of air, producing only carbon dioxide and water vapor, which are relatively easily separated. Oxy-fuel combustion, however, produces very high temperatures, and the materials to withstand its temperatures are still under development.
Another long-term option may be carbon capture directly from the atmosphere using hydroxides. In this scheme, the air would be chemically scrubbed of its CO2 content. This carbon capture mechanism offers an alternative to the use of non-carbon-based fuels in the transportation sector (for which there are fewer current options).
U.S. Patent Application Publication No. 2005/0154669 describes a carbon credit system wherein a carbon credit product or carbon credit service can be purchased through carbon credit software and which carries a predetermined number of carbon credits. The purchase causes a certificate bearing a carbon credit consumer symbol to be sent to the purchaser. This carbon credit marketing system is designed to enable a consumer to pay for the amount of greenhouse gases he or she produces as a result of his or her consumption of goods and services which effect emission of such gases. This is accomplished though the purchase and sale of carbon credits which in turn correlate to a carbon credit value assigned to a producer or user. The carbon credit software allows the creation of a client account and maintains a carbon credit balance in the account.
Emissions trading (or “cap and trade”) is an administrative approach designed to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
A central authority (usually a government) sets a limit or cap on the amount of a certain pollutant that can be emitted. Companies or other entities are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount of that pollutant. The total amount of allowances and credits cannot exceed the cap, thereby limiting total emissions to a certain level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a premium for polluting, while the seller is being rewarded for having reduced emissions by more than was required. Thus, in theory, those that can reduce emissions most cheaply will do so, thereby achieving pollution reduction at the lowest possible cost to society. Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tons of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading.
The overall goal of an emissions trading plan is to reduce emissions. The cap is usually lowered over time towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap-and-trade systems, organizations which do not pollute may also participate, thus environmental groups can purchase and retire allowances or credits and hence drive up the price of the remainder per the law of supply and demand. Corporations can also prematurely retire allowances by donating them to a nonprofit or charitable entity and then be eligible for a tax deduction. Allowances may be accounted for on the balance sheet of a company as intangible assets
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the lowest cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
The textbook emissions trading program can be called a “cap-and-trade” approach in which an aggregate cap on all sources is established and these sources are then allowed to trade among themselves to determine which sources actually emit the total pollution load. An alternative approach is a “baseline and credit program” wherein a group of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit.
There are active trading programs in several pollutants. For greenhouse gases, the largest is currently the European Union Emission Trading Scheme (EU ETS). In the United States the most prominent example of an emission trading system is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act. Under this program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% between 1980 and 2010. Several regional markets in nitrous oxide also exist in the United States. Markets for other pollutants tend to be smaller and more localized. In 2003, some corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
An emission cap and permit trading system is a quantity instrument because it fixes the overall emission level (quantity) and allows the price to vary. One problem with the cap-and-trade system is the uncertainty of the cost of compliance inasmuch as the price of a permit is not known in advance and will vary according to market conditions. In contrast, an emission tax is a price instrument because it fixes the price while the emission level is allowed to vary according to economic activity. A major drawback of emission taxes is that the environmental outcome (i.e., the quantity of emissions) is not guaranteed.
Some scientists, however, have warned of a threshold in atmospheric concentration of carbon dioxide beyond which a run-away warming effect could take place. If this is a real risk, a quantity instrument could be a better choice because the quantity of emissions may be capped with a higher degree of certainty. However, this may not be true if this risk exists but cannot be attached to a known level of GHG concentration or a known emission pathway.
A third option of the prior art, known as a “safety valve”, is a hybrid of the price and quantity instruments. The system is essentially an emission cap and tradable permit system but the maximum (or minimum) permit price is capped. Emitters have the choice of either obtaining permits in the marketplace or purchasing them from the government at a specified trigger price (which could be adjusted over time). The system is sometimes recommended as a way of overcoming the fundamental disadvantages of both systems by giving governments the flexibility to adjust the system as new information becomes available. By setting the trigger price high enough, or the number of permits low enough, the safety valve can be used to mimic either a pure quantity or pure price mechanism.
The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It is currently the world's only mandatory carbon trading program.
After voluntary trials in the UK and Denmark, Phase I commenced operation in January 2005 with all 15 (now 25 of the 27) member states of the European Union participating. The program caps the amount of carbon dioxide that can be emitted from large installations such as power plants and carbon-intensive factories and covers almost half of the EU's carbon dioxide emissions. Phase I permits participants to trade among themselves and in validated credits from the developing world through the Kyoto Protocol's Clean Development Mechanism. Phase II links the EU ETS to other countries participating in the Kyoto Protocol's trading system.
Over a decade ago, many countries joined an international treaty—the United Nations Framework Convention on Climate Change (UNFCCC)—to begin to consider what might be done to reduce global warming and to cope with any inevitable temperature increases. A number of nations have approved an addition to the treaty, the so-called Kyoto Protocol, which binds most developed nations to a cap-and-trade system for major greenhouse gasses. Emission quotas were agreed upon by each participating country, with the intention of reducing their overall emissions to 1990 levels by the end of 2012. Under the terms of the treaty, nations that emit less than their quota will be able to sell emissions credits to nations that exceed their quota.
It is also possible for developed countries within the trading scheme to sponsor carbon projects that provide a reduction in greenhouse gas emissions in other countries, as a way of generating tradable carbon credits. The Protocol allows this through Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, in order to provide flexible mechanisms to aid regulated entities in meeting their compliance with their caps. CDM is a mechanism under the Kyoto Protocol through which developed countries may finance greenhouse-gas emission reduction or removal projects in developing countries, and receive credits for doing so which they may apply towards meeting mandatory limits on their own emissions. Certified emission reductions (CER)—a Kyoto Protocol unit equal to 1 metric ton of CO2 equivalent—are issued for emission reductions from CDM project activities. Two special types of CERs called temporary certified emission reduction (tCERs) and long-term certified emission reductions (lCERs) are issued for emission removals from afforestation and reforestation CDM projects. The UNFCCC validates all CDM projects to ensure they create genuine additional savings and that there is no “leakage”—an increase in carbon dioxide emissions by some countries as a reaction to an emission reduction by countries with a strict climate policy.
An enforcement mechanism is a critical part of any emissions trading scheme. Without effective enforcement, the allowances have no value. Two basic schemes have been proposed. In one, regulators measure facilities and fine or sanction those that lack the necessary allowances for their emissions. This scheme is quite expensive to enforce and the burden falls on the agency which may need to collect special taxes to finance the program. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another scheme, a third party agency, certified or licensed by the government, verifies that polluting facilities have allowances equal or greater than their emissions. Inspection of the certificates may be performed in some automated fashion by the regulators or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that the certifying agencies are acting correctly. This scheme places the cost of most regulation on the private sector.
A “carbon offset” is an act by an individual or organization that mitigates (i.e., offsets) greenhouse gas emissions. Thus, one may pay for emission reductions elsewhere rather than reducing one's own emissions. For a given entity, offsets may be a cheaper or more convenient alternative to reducing fossil fuel consumption. In contrast to emissions trading, which is regulated within a legal framework, carbon offsets generally refer to acts by individuals or companies that are arranged by commercial or not-for-profit carbon-offset providers.
Currently used carbon offsets fall into four categories: tree planting, energy conservation, renewable energy and methane capture. Tree planting acts to offset carbon emissions because trees sequester carbon through photosynthesis, converting carbon dioxide and water into molecular oxygen (O2) and plant organic matter, such as carbohydrates (e.g., cellulose). Tree planting includes not only reforestation but also the avoidance of deforestation and afforestation, the establishment of forests on land not previously forested. This can produce higher carbon sequestration rates because the level of carbon in such land is comparatively low. Trees provide other benefits in addition to capturing carbon dioxide, such as providing habitats for animals and renewable resources, such as lumber and other wood-based building materials, and preventing soil erosion.
Energy conservation can constitute a carbon offset by reducing the overall demand for energy. Examples include cogeneration plants that generate both electricity and process heat from the same power source, thus improving the overall energy efficiency of the plant, fuel efficiency projects that replace a device with one which uses less fuel per unit of energy provided such as the substitution of fluorescent lights for incandescent lights. Assuming energy demand does not change, this reduces the total carbon dioxide emitted by the burning of fossil fuels. Another example of energy conservation which may constitute a carbon offset is improved energy efficiency of buildings such as additional (or more effective) insulation, the installation of double-glazed windows and more efficient heating, cooling or lighting systems. New buildings can also be constructed using less carbon-intensive materials.
The development and/or utilization of renewable energy can also be a carbon offset. Currently, wind farms, solar energy installations, hydroelectric facilities and biofuel production are the most common forms of renewable energy. A connection is sometimes made between carbon offsets and renewable energy certificates (RECs), also known as Green Tags. An REC represents a certain quantity of electricity which was generated from renewable sources. By purchasing an REC, the customer pays money to a renewable energy project owner. Typically, the windmill or solar panels have already been installed which leads to lower carbon emissions.
Methane gas has global warming potential 23 times that of carbon dioxide. However, when combusted, each molecule of methane produces one molecule of carbon dioxide. Thus, the collection and combustion of methane may be preferable to merely releasing it into the atmosphere. Some offset projects consist of combusting or containing methane generated by farm animals, landfills or other industrial waste. Methane can also be processed using an anaerobic digester which generates electricity or heat.
Once it has been accredited by the UNFCCC, a carbon offset project can be used as carbon credit and linked with official emission trading schemes, such as the European Union Emission Trading Scheme or Kyoto Protocol, as Certified Emission Reductions.